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BUAD 307 PRICING Lars Perner, Instructor 1 PRICING Often the only marketing mix variable allowing for immediate competitive response Important part of.

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Presentation on theme: "BUAD 307 PRICING Lars Perner, Instructor 1 PRICING Often the only marketing mix variable allowing for immediate competitive response Important part of."— Presentation transcript:

1 BUAD 307 PRICING Lars Perner, Instructor 1 PRICING Often the only marketing mix variable allowing for immediate competitive response Important part of product positioning Long term effects of pricing decisionsyour decisions may come back to haunt you!

2 BUAD 307 PRICING Lars Perner, Instructor 2 Learning Objectives Understanding –Price choices faced by managers, the constraints faced on these choices (e.g., legal), and the consequences of these choices –Signaling effects of product prices –The respective interests of manufacturers and retailers in product pricing Appreciating the advantages and disadvantages of different pricing strategies

3 BUAD 307 PRICING Lars Perner, Instructor 3 One View of Price Price = resources given up _____________________________________ goods received E.g., 12 bullets for $6.00 = $0.50 per bullet Ways to change the price: –Sticker price –Quantitysame sticker price but lesser quantity –Qualityuse of lower cost materialse.g., gooeye stuff rather than chocolate in candy –Terms E.g., support, accessories, payment terms, delivery

4 BUAD 307 PRICING Lars Perner, Instructor 4 Views of Consumers and Price Response Economics –Assumed to have perfect information about Quality of all brands Prices of each brand at all locations –Elasticity: A down-sloping demand curve means that a higher quantity will be demanded when the price is reduced Marketing –Consumer knowledge of product quality and prices is imperfect –Due to imperfect information, a higher price may sometimes be used by consumers to infer greater quality (Research suggests that actual product quality as rated by Consumer Reports accounts for about 25% of product price differences among brands)

5 BUAD 307 PRICING Lars Perner, Instructor 5 Supply, Demand, and Quantities Supplied and Demanded

6 BUAD 307 PRICING Lars Perner, Instructor 6 Supply, Demand, and Quantities Supplied and Demanded Supply: The schedule, or curve, of quantities supplied by the sellers at various prices offered by buyers –Tends to increase with pricea greater quantity will be supplied at a higher level of incentive to produce Demand: The schedule, or curve, of quantities demanded by the buyers at various prices offered by sellers –Tends to decrease with pricethe marginal value of additional quantity tends to decline with a greater price –Occasionally, higher prices may lead to higher quantity demanded due to a possible signal of quality Equilibrium: The intersection of the supply and demand curves neither side is interested in buying or selling more or less given the resultant market prices –This equilibrium may be temporary and may change once the market changese.g., Changes in the availability change in supply Changes in cost of production change in supply Availability of new substitutes change in demand Quantity supplied: The quantity that will be supplied (sold) by sellers at a given price point Quantity demanded: The quantity that will be demanded (bought) by buyers at a given price point

7 BUAD 307 PRICING Lars Perner, Instructor 7 Price Discrimination Explicit –Only some customers are eligible for special pricinge.g., Student discounts on software Senior citizen discounts Geographic: Only customers in the 900**- 935** zip code areas are eligible for discount Disneyland Admission Implicit –No outright rule, but discounted deal is unattractive to some customers Airlines: Saturday night stay-over or advance purchase requirement Daily special mealone cheaper meal but no choice Periodic discounting (products going on and off sale)

8 BUAD 307 PRICING Lars Perner, Instructor 8 Some Approaches to Pricing Cost-plus: Add fixed percentage markup Skimming: high intro price ---> take advantage of price insensitive consumers Penetration pricing: low intro price ---> volume Buyer-based Perceived value Going-rate (competition) ---> Balancing cost and market considerations

9 BUAD 307 PRICING Lars Perner, Instructor 9 Skimming Pricing P2 P3 Q3 The product is introduced at a high price, P 1. Very few customersonly the least price sensitive onesbuy at this price. When the price is later lowered to P 2 and then to P 3, other customers who value the product less will start to buy. The least price sensitive customers pay a premium for quick access to the new product.

10 BUAD 307 PRICING Lars Perner, Instructor 10 Penetration Pricing P1 Q1 The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curvesthe tendency of production costs to decline with the cumulative production costs are reduced.

11 BUAD 307 PRICING Lars Perner, Instructor 11 Legal Issues Banned by Federal law: –Discrimination in prices paid by firms which compete against each other unless supported by evidence of cost savings OK to charge restaurants more than grocery stores Can only charge Wal-Mart less than Joes Supermarket if volume savings can be proven and the price difference must be no greater than the actual provable cost savings. Banned by some state laws: –Gender discrimination (e.g., charging more for dry cleaning womens clothes than mens clothes) –Discrimination between consumers in general Senior citizen discounts are explicitly permitted in California

12 BUAD 307 PRICING Lars Perner, Instructor 12 More Legal Issues Federal and State bans on: –Collusion (coordinating or even discussing prices with competitors) –Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices) In general, fully absorbed average cost must be used cannot use marginal cost –Using monopoly power in one market to subsidize new market

13 BUAD 307 PRICING Lars Perner, Instructor 13 Price Maintenance In 2007, the U.S. Supreme Court reversed the longstanding ban on explicit agreements between manufacturers that the branded product would not be sold below an agreed upon floor price –Although setting minimum retail prices for a brand reduces intra-brand competition (competition between different retailers selling the brand), some believe that minimum prices may encourage investment in service and brand building to the extent that competition between brands increases (inter-brand competition) –Manufacturers generally cannot enforce minimum price agreements on existing inventory, but they can cut off offending retailers Gray market goods: Retailers in the U.S. generally have an absolute right to sell products that they have bought legally at a price lower than the suggested retail price. –Diversion: Legitimate retailers buy up extra quantity to be resold to unauthorized dealers and/or geographic shipment. (More details will be given under distribution).

14 BUAD 307 PRICING Lars Perner, Instructor 14 Other Manufacturers Suggested Retail Prices (MSRPs) U.S. manufacturers often put an exorbitantly high suggested price on a product so that even full service retailers can look good by selling below the MSRP In some EU countries, selling below the MSRP may not be legalmanufacturers must therefore be careful not to recommend excessive prices

15 BUAD 307 PRICING Lars Perner, Instructor 15 REMINDER INCOME WILLINGNESS TO SPEND!

16 BUAD 307 PRICING Lars Perner, Instructor 16 Price Adjustments For and Discrimination Among Consumers Cars: List price – manufacturer discounts and rebates – dealer discount Tuition: List price – scholarships – financial aid Text, p Copyright © 2005 McGraw-Hill.

17 BUAD 307 PRICING Lars Perner, Instructor 17 Introductory Effects In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another. After 8 weeks, price was raised to $0.79 for low price intro condition. There were higher cumulative sales in high price intro.

18 BUAD 307 PRICING Lars Perner, Instructor 18 Consumer Price Awareness A survey revealed of consumers who had just selected a product suggested: Avg. time spent before departing from product area: 12 seconds Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand 55.6% could state price of just chosen product within 5%

19 BUAD 307 PRICING Lars Perner, Instructor 19 Consumer Reference Prices Consumers typically have some expectation of what they will pay. This is based on: previous experience common sense perceived fairness Two kinds of reference prices: Internal: Based on consumers memory. External: Based on environment (e.g., signs, other products in the store )

20 BUAD 307 PRICING Lars Perner, Instructor 20 Internal Reference Prices Consumers tend to develop some memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lower More knowledgeable consumers typically have tighter price range expectations Reference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable stimuli (prices) may be rejected as unreal Consumer reference prices tend to be lower than actual prices ---> sticker shock

21 BUAD 307 PRICING Lars Perner, Instructor 21 External Reference Prices Reference prices provided by seller or environment E.g., MSRP $3.99; our price $2.49 Sold elsewhere for $20.00; our price $14.99 Was $100.00; now $69.95

22 BUAD 307 PRICING Lars Perner, Instructor 22 The Promotion Signal A segment of consumers will respond to negligible discounts--e.g., SALE! $3.95 (Was $4.02). However, merely placing a sign EVERYDAY LOW PRICE randomly also increased sales of affected products.

23 BUAD 307 PRICING Lars Perner, Instructor 23 Odd/Even Pricing--Does It Have an Impact? Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to $2.00 plus change Reality: Studies in U.S. have found a small impact; no impact found in Germany Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).


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